Disclosure Dilemma: Streamlining Disclosures for Smoother FPI Flow

[Isha Sharma is a 4th year B.A., LL.B. (Hons.) student from Gujarat National Law University, Gandhinagar]

The Securities and Exchange Board of India (“SEBI”), as the primary authority overseeing the Indian securities market, regularly reviews and updates regulatory frameworks to harmonize the evolving market dynamics with the best global practices. In 2023, SEBI introduced significant amendments to SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”), aimed at enhancing transparency and curbing potential misuse of the foreign portfolio investments (“FPI”) route. One of the primary objectives behind these amendments was to address concerns regarding beneficial ownership structures and ensure greater regulatory oversight over FPI activities

This amendment sparked evident concerns among market participants as SEBI geared itself towards tightening regulations governing FPI. Nevertheless, a recent consultation paper dated 7 February 2024 issued by SEBI appears to seek to mitigate the impact of these stringent measures.

SEBI’s Proposal: A Much Needed Respite for Market Participants?  

The consultation paper released by SEBI attempts to provide clarity and reduce some of the regulatory burdens imposed by the 2023 amendments. While reaffirming SEBI’s commitment to maintaining its position as the primary regulator, the paper also recognizes the practical difficulties faced by FPIs in complying with the stringent disclosure requirements within the stipulated timelines.

One of the noteworthy aspects of the consultation paper is the acknowledgment of the need for a more refined and liberal approach towards regulatory enforcement, taking into account the diversity of FPI operations and the ever-evolving market dynamics. The paper recognises the need for easing the seven working-day requirement to submit and ensure the compliances by FPIs under regulation 22 of the FPI Regulations. The market participants submitted to SEBI that the seven working-days notification requirement increases the compliance challenges, as gathering the required information from entities spread across various jurisdictions may take several weeks. This becomes even more challenging in case documents with wet ink signatures of authorized signatories are required to be sent from across jurisdictions.

The next suggestion relates to categorizing material changes that necessitate disclosure into two types and extending the timeline for certain disclosures. Here, SEBI demonstrated a willingness to engage with market participants and address their concerns in a pragmatic manner.

In response to the aforementioned recommendations, SEBI took proactive steps by constituting a dedicated working group known as the Working Group for review of FPI Regulations, 2019 (“FPI Working Group”). The main task of the given group was reviewing the existing FPI regulations and addressing concerns raised by stakeholders, specifically relating to disclosure timelines.

The primary reasoning adopted by market participants for an extension of the current timeline of seven working days was so that the given regulations align with the requirements outlined in the Prevention of Money laundering (Maintenance of Records) Rules, 2005 (“PMLR”), suggesting an extension to 30 days. However, it was noted within the FPI Working Group that the existing framework necessitated depository participants to examine material changes and reassess the eligibility of FPIs, potentially leading to requirements for fresh registration. Recognizing this aspect, the group deliberated further to find a balanced approach.

After thorough discussions and considerations, a consensus was reached within the FPI Working Group. It was agreed that as regards material changes that require fresh registration or impact privileges/exemptions, FPIs would be required to make the necessary disclosure within seven working days of such changes. Subsequently, supporting documents could be provided within 30 days from the occurrence of the change.

This decision reflects a pragmatic approach taken by SEBI and the FPI Working Group, acknowledging the need to balance regulatory requirements with operational feasibility for market participants. By providing a clear framework for disclosure timelines, SEBI aims to enhance transparency and regulatory compliance while addressing the concerns raised by stakeholders.

Implications and Conclusion

The amendment introduced by SEBI and the subsequent consultation paper have a significant impact on the Indian capital markets and investor sentiment. On the one hand, the greater regulatory oversight and transparency measures by SEBI introduced in the 2023 Amendment are expected to strengthen investor confidence and mitigate risks associated with cryptic ownership structures and potential market abuses. On the other, the easing of certain disclosure timelines and the acknowledgement of real-world challenges faced by FPIs suggested in the consultation paper released by SEBI signal its responsiveness to market feedback and its commitment to fostering a conducive regulatory environment for foreign investors.

Moreover, the amendments highlight the delicate balance that regulators must strike between ensuring regulatory compliance while supporting market efficiency. Stringent regulations are essential for safeguarding investor interests and maintaining market integrity, but at the same time excessive regulatory burden can stifle innovation, deter foreign investments, and become a hurdle in the development of  the market. By engaging in a consultative process with market participants and soliciting their feedback, SEBI has demonstrated its commitment to adopting a collaborative and inclusive approach towards regulatory governance.

Furthermore, the amendments highlight the broader trend towards convergence and harmonization of regulatory standards across global markets. As cross-border investments continue to proliferate, regulators face increasing pressure to align their regulatory frameworks with international best practices while also addressing jurisdiction-specific considerations and market dynamics. In this context, SEBI’s efforts to strike a balance between regulatory stringency and investor facilitation are commendable and underscore its role as a proactive and responsive regulator in the global financial landscape.

– Isha Sharma

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